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What is a ‚Treasury Bill – T-Bill‘
A Treasury bill (T-Bill) is a short-term debt obligation backed by the U.S. government with a maturity of less than one year, sold in denominations of $1,000 up to a maximum purchase of $5 million. T-bills have various maturities and are issued at a discount from par. When an investor purchases a T-Bill, the U.S. government writes an IOU; investors do not receive regular payments as with a coupon bond, but a T-Bill pays an interest rate.
BREAKING DOWN ‚Treasury Bill – T-Bill‘
T-Bills are attractive to investors because they offer a very low-risk way to earn a guaranteed return on invested money. They benefit the U.S. government because the government uses the money raised from selling T-bills to fund various public projects, such as the construction of schools and highways. T-bills can have maturities of just a few days up to the maximum of 52-weeks, but common maturities are one month, three months or six months. The longer the maturity date, the higher the interest rate that the T-Bill will pay to the investor.
T-bills can be purchased at auctions held by the government, or investors can purchase T-bills on the secondary market that have been previously issued. T-Bills purchased at auctions are priced through a competitive bidding process, at a discount from the par value. When investors redeem their T-Bills at maturity, they are paid the par value. The difference between the purchase price and par value is interest. For example, an investor purchases a par value $1,000 T-Bill for $950. When this T-Bill matures, the investor is paid $1,000, thereby making $50 on the investment.
Benefits to Investors
There are a number of advantages that T-bills offer to investors. They are considered low-risk investments because they are backed by the credit of the U.S. government. With a minimum investment requirement of just $1,000, and a maximum investment of $5 million, they are accessible by a wide range of investors. In general, interest income from Treasury bonds is exempt from state and local income taxes. They are, however, subject to federal income taxes, and some components of the return may be taxable at sale/maturity. The main downfall of T-bills is that they offer lower returns than many other investments, but these lower returns are due to their low risk. Investments that offer higher returns generally come with more risk.
For more on this topic, check out the Money Market: Treasury Bills Tutorial.